Sunday, July 11, 2010

The connecting value that holds society together resists the novelty seeking value of explorers. A dynamic tension exists between these two social forces; to change and to remain, which is destabilised by innovation and entrepreneur's effort. A community, society, club, association or family is an aggregation of community shared values. These values are ongoing connections and connecting. Novelty emphasises and values newness, while community (resistance) emphasises shared ongoing practices that constitute the identity of the community.

From the perspective of the Innovator, shared ongoing community practices (tradition) look like resistance. From the perspective of the Community, novelty (change, innovation) looks like distraction from ongoing community constituting practices. Community resists Innovation to the extent the change disrupts community identity. Rogers compatibility factor of speed of adoption captures this idea. Innovation unravels Community by changing constituting practices.

Thus innovation and resistance are two alternate value perspectives, valuing the new, and the known, those practices that constitute the community.

A new results chapter, brings me to further reflect on what innovation is? My review of the innovation literature, and finding recent exponents of the two perspectives encourages me to document the difference I found, and my argument of its impact.

Supranormal profits are the reward for successful innovation (Nelson and Winter 1982*, p.409).

Innovation is the successful commercial exploitation of new ideas… The eventual aim of [innovation] is the delivery of value and the process of commercialisation – that is obtaining returns from innovation investments – is a central element of MTI (management of technological innovation). (Dodgson, Gann and Salter 2008*, p.4).

[Managers] confuse novelty with innovation. The test of an innovation is that it creates value. A novelty only creates amusement. Managements decide to innovate for no other reason than they are bored doing the same thing or making the same product day in and day out. The test of an innovation – as is also the test of quality – is not ‘Do we like it?’ It is: ‘Do customers want it and will they pay for it?’ (Drucker 1999, p.85).

Two perspectives contest what innovation means. Is innovation profit oriented (Dogson et al 2008), or is innovation consumer and value oriented (Drucker 1999)? This chapter examines value from a consumer’s perspective and seeks to understand innovation through understanding consumer value. Management simplifying of innovation theory to a profit focus has reoriented innovation away from value creation. A single word dropped has caused the problem. The strategic management catch cry is “innovate or die” (Dess, Lumpkin and Eisner 2006, p.400) because supranormal profits are the reward of the innovator. By dropping ‘successful’ from the Nelson and Winter quote (see above), the need for value creation disappears. Innovation without a requirement of success, becomes novelty, and results in definitions in Strategic Management such as Innovation involves introducing or changing to something new (Dess et al 2006, p.397). They go on, saying Innovation is essential to sustaining competitive advantage (p.400). Now, anything ‘new’ will lead to sustained competitive advantage, and value has been lost in the wilderness. Such slight simplifying of what innovation is, by removing value creation as a focus, makes innovation easier because consumer’s input is no longer essential. Consumer needs, the focus of value, are no longer relevant, since value creation is no longer required. Yet management is mystified when such innovations fail, blaming the resistance of consumers (rather than their poor understanding of what consumers want or need). This thesis seeks to put value back in the centre of our understanding of what innovation is. Better understanding value, will help management to better understand innovation. Innovation becomes ‘something new that creates value’. <image source>

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All quotes:

A cynic knows the price of everything and the value of nothing (Oscar Wilde in Green 2009).

Supranormal profits are the reward for successful innovation (Nelson and Winter 1982*, p.409).

Profit is not the explanation, cause or rationale of business behaviour and business decisions, but rather the test of their validity (Drucker in Green 2009).

Innovation is the successful commercial exploitation of new ideas… monopoly power is useful in providing incentives to technological research (Schumpeterian rent). (Dodgson, Gann and Salter 2008*, p.4, 9)

The eventual aim of MTI is the delivery of value and the process of commercialisation – that is obtaining returns from innovation investments – is a central element of MTI (management of technological innovation) (Dodgson et al 2008*, p.4).

Innovation is the search for and exploitation of new opportunities for satisfying human wants and needs… Entrepreneurship create[s] a new market and a new customer… Customers only pay for what is of use to them and gives them value. Nothing else constitutes quality. (Drucker 2007, p13, 20, 206).

[Managers] confuse novelty with innovation. The test of an innovation is that it creates value. A novelty only creates amusement. Managements decide to innovate for no other reason than they are bored doing the same thing or making the same product day in and day out. The test of an innovation – as is also the test of quality – is not ‘Do we like it?’ It is: ‘Do customers want it and will they pay for it?’ (Drucker 1999, p.85).

The starting point [of management] has to be what customers consider value (Drucker 1999, p.29).

* Gans (2009), found overall social benefits, using a month consumer payments and surplus analysis here, and pdf here.

* My previous attempt on this blog (Apr 2009), which suggested an operating shortfall of $40 million per month: available here.

I have updated my Cost benefit analysis of the NBN and attach it for your information (here ; updated for broken link, Apr.2013). Given the recent Senate Report calling for a cost benefit analysis, and media talk, I thought I would have a go at putting one together. About three hours work.

I found that to achieve a positive NPV, the NBN needs to add between 0.5 and 1.0% to GDP per annum. Approx $7 billion per annum, proportional to % build complete from network 50% complete. I add NPV for NBN Co, including projected revenue, depreciation, operating costs, but no interest.

This model assumes, funding/interest at 5%, consumer takeup maximum 70%, corporate takeup maximum 90% at year 8, pro rata over the course of the build, with accelerating takeup as the build passes 50% complete.

In the model I assume that the Federal Government pays interest on $43 billion invested at 5%. That Telstra loses 50% of its value over the network build (about $20 billion). That NBN Co earns profits, which pay down the $43 billion NBN investment, and NBN Operating expenses of 20% of depreciation (about $430 milllion after build). Depreciation straight line at 5% per annum.

Future adjustments to model could include: grossing Telstra loss up to future value (adds about $10 billion, and reduces NPV by $7 billion), adding other telco losses, eg Optus, AAPT, shaping GDP gains from high in mid term, and dropping over the longer term.

The spreadsheet allows all these variables to be manipulated and show the impact on NBN and National NPV. I look at cashflows for years 1-15, and discount at 5%, including debt outstanding at that point. If you have any questions about the model or would like to discuss it, please let me know.